We Want Bigger 401(k) Matches - Even When We Shouldn't

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Dan Caplinger is an attorney and financial planner covering retirement, ETFs, personal finance, and general investing for the Motley Fool. With nearly 20 years of diverse experience as a tax and estate planning lawyer, trust administrator, personal financial advisor, and independent consultant, Dan has developed a healthy skepticism of the mainstream financial industry and aims to make complex legal and financial concepts easier for his readers to understand. Dan has worked with the Motley Fool since 2006 as a retirement, tax, and investing expert with a focus on introducing new investors to the opportunities of smart financial planning.

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The idea of getting matching 401(k) contributions from your employer to help you save for retirement is attractive to many workers. In fact, it's such an attractive proposition that, as a recent survey found, people are willing to pay for that free money in the form of lower salaries -- even if it leaves them no better off than they would be without it.

Many people think of 401(k) matching contributions as free money, because they represent additional funds that your employer deposits into your 401(k) account to encourage you to save for your own retirement. One common example involves employers putting in 50 cents for every $1 you save, up to a certain maximum percentage of your salary, often 6 percent. That scenario adds an extra 3 percent of your salary in your retirement account if you put 6 percent into it.

A recent survey from Fidelity showed just how much workers like matching contributions. According to the survey, 43 percent of workers would rather have lower compensation if it meant having greater access to employer contributions from company matching. Moreover, only 13 percent would accept a job with no company match at all, even if the job paid more than similar jobs that did offer matching.

Fortunately for those who like employer matching, businesses have caught onto the trend. Fidelity says that 79 percent of the employer retirement plans it helps manage include some form of additional money for workers, whether it be a matching contribution or simple profit-sharing contributions that don't necessarily require a set level of participation from workers. The typical net match of 4.3 percent amounts to about $3,540 per worker each year.

Why You Should Take the Extra Pay Instead

Yet the Fidelity survey results indicated a fundamental misunderstanding about the nature of matching contributions. Specifically, the survey's question on the top offered four choices, with varying combinations of base pay and matching contributions that all added up to the same $100,000 amount. The most popular mix of base pay and match was $75,000 base and $25,000 match, with $90,000 base and $10,000 match coming in a close second.

Yet if matching contributions lead to a dollar-for-dollar drop in salary, they certainly are no longer "free" money, and you can sometimes give up more than you get. If your base pay is $100,000, you can always make contributions yourself that will bring your total annual savings to $17,500, or $23,000 if you're 50 or older. That's not quite as high as the 75/25 split that was the most popular choice in the survey, but it's more than sufficient to do a 90/10 split. Your own contributions are also excluded from your taxable income, so the tax benefits are the same regardless of whether you voluntarily make them out of your own paycheck or your employer pays them in the form of a match.

Matching contributions also come with restrictions that your own contributions don't have. Most employer contributions have vesting requirements, which means that you have to work a certain minimum period -- often three years -- or else you'll forfeit the match and any profit-sharing contributions your employer made on your behalf. By contrast, whatever you contribute is always yours to keep, no matter how long you keep your job.

Take What Your Employer Gives You

Of course, most of us don't have a say in deciding whether to get higher salaries or a 401(k) match. If your employer offers matching contributions, then it still makes sense to take maximum advantage of the extra money it means for your retirement. Just keep in mind that if you're job-hunting, getting access to an employer match might not be worth taking a smaller salary.

Economics 101

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socioeconomist1

People are stupid... They think they are going to live forever. I have never bought insurance. I have never contributed to a retirement account. I was also not raised by a scared woman that taught me to fear the unknown in life and call it thinking smart.

I am a real man who gets 30% to 50% returns out of the stock market because I have a man's mentality of do for yourself and rely on no one for anything. So, I spent the time to learn how to invest. My retirement and my individual account are one in the same... Trying to beat taxes is nothing more than stepping over a dime to pick up a nickel.

I feel so sorry for all the males in this world that were taught by their mothers or metrosexual fathers... They are sad and pathetic wretches that think like a woman and pretend to be a man.

"Real men" do not call other people stupid. "Real men" do make sexist remarks. "Real men" do not have to lie about economic success and yes if you are claiming 30-50% returns I am calling you out as a liar. "Real men" do not have the need to brag or present themselves as "superior"

If you are over 50 and maxing out your normal and "catch up" contributions, the employer matching is the only way to contribute more than the 23k limit. With many matching plans this can take your yearly contribution to 30K

Mike, you are right on the money! The author seemed to have missed this important point. For all us who are already contributing the max of 23k, this is one way to be able to contribute more. This probably applies mostly to boomers close to retirement, which is a large part of the investing population.

My wife just finally reitred at 68.5.. Her decisions ot retirer was very easy after her company (employer for 17 yearts), announced that they would no longer match 401'k.s. Company contributions to a retirement plans will limited ot stock options during good years. When she first stared to work for this company ,they offered a fixed pension.Eight years ago they announded that the pensions would be frozen, but that there would be a 401k match of 5 percent, and a whopping ten percent match for emplyees over 55. Upper mangement, of course, met this criteria. So did my wife. So she stayed, and yes did take advantage of the match.That asida. pay raises stopped. They were very low as a whole, and for her it was impossibile to obtain a raise despite commendable performance. So over the last eight years of work, inflation ate away at actual pay. She is now getting a very small pension from work, and we are being deluged by "fiancial advisors who want ot mange our money. No thanks,We'll the minimum required distribution and re-envest as much as we can while we can. We are also invested in Roth IRAs. Sadly we did not start Roth IRA s unitl 6 or 7 years ago. We woulld have been better off with payraises and roth investments.. As a further aside, I also learned that I did not have control over my own 401 k funds. My foremer, pre-retirement emplyer switched administrators and did not notify me or other retirees. .I nearly had a heart attack when I checked my balance and saw a big fat zero!!! I got my savings out of there fast. ! The new adminstrator did not offer fixed interest options, only stock market based options. I do not beleive in the Stock market casino. I cant imagine what will happen after the politians follow the recomendations of Wall Street contrbutors and privitize social security.